Level 2 Analysis

[VinceField]

How do you use level 2 to inform your trading decisions? What do you look for and what does that tell you about what is likely to happen with price action?

One thing I've seen is that if there is a big buyer sitting and waiting lower than the bid price, this is a bearish sign, as once that buyer is sold off, the price is likely to shoot down.. that support is gone.

Likewise, if there is a big seller sitting and waiting lower than the ask price (asking for a higher price than the ask), this is a bullish sign, as once this seller is bought off, the price is likely to shoot up.. that resistance is gone.

 

[Trader333]

One of the issues with Level 2 is that it cannot see or factor in "market" orders and if most of the trading is done at market then it is of no use at all. It has also been used in the past to spoof and by that I mean that a huge order could be sat at a key level to give others an impression of order intention and then pulled before any trades are made at the level is was at. Also in the past it was possible to have hidden orders that are sat at key levels but are not seen in the level 2 book.

 

[andre2886]

How do you use level 2 to inform your trading decisions? What do you look for and what does that tell you about what is likely to happen with price action?

One thing I've seen is that if there is a big buyer sitting and waiting lower than the bid price, this is a bearish sign, as once that buyer is sold off, the price is likely to shoot down.. that support is gone.

Likewise, if there is a big seller sitting and waiting lower than the ask price (asking for a higher price than the ask), this is a bullish sign, as once this seller is bought off, the price is likely to shoot up.. that resistance is gone.

Level 2 market depth shows you exactly this...the market depth...on the right-hand side you can see the ask prices and on the right the bid. The idea is that when you use it...you have certain key points that you want it to hit (from a technical analysis ) once you hit them you can join the fun and see your p&l going mad with level 2 you can place buy or sell orders either on the bid or on the ask...this is something you can not do with market orders.
You are correct regarding the buyers and sellers on the bid and ask...if you have a 15000 share seller on a ask price that can be considered a good resistance...unless the stock is surging like crazy and that guy gets filled very fast.
The same goes if you are a short-biased trader and there is a big buyer on the bid you may want to bail out before he gets filled.

For level 2 is always good to use time and sales as this gives a quick insight as to what is actually happening at that moment in the market.

Hope this helps.

P.S.

If you want to scalp you need to be familiarized with level 2 and time and sales